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Copyright: Toni Straka, 2005-2011 This blog is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Wednesday, June 16, 2010

It was the Wall Street Journal that alerted the world to the fact that Federal Reserve Chairman Ben Bernanke is puzzled by the gold price. Speaking to the Congress' Committee on the Budget on June 9, the WSJ reported these remarks of Bernanke, claiming that the Fed head is "a bit puzzled" by gold's price ascent:

Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes. Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently. Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year."I don’t fully understand movements in the gold price," Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.

Keeping in mind this is the same person that still denies that the global economic downturn is a direct result of artificially low rates and a lack of financial regulation the Fed chairman sets the stage for his next epic fail by mistaking the only universally and voluntarily accepted form of money as a commodity.

Gold is not a "commodity" and has never been since the Lydians minted the first gold coin in the world about 600 BC. The specimen pictured here weighs 4.71 grams, has a diameter of 13mm at its widest, and at 4mm, is thick as a nugget. It likely consists of about 55 percent gold, 43 percent silver, 2 percent copper, and trace amounts of lead and iron. It trades between $1,000 and $2,000 in numismatic cercles and has never devalued to zero purchasing power.
Looking back in history reveals more clues that gold-backed money correlated highly with the prosperity of nations. It is no coincidence that "solid" is derived from the Solidus coin.
This coin was the standard in the Roman empire from the 4th to the 10th century. According to Wikipedia the coin was introduced by Emperor Constantin in 312 AD and was the accepted medium of exchange for 700 years because it kept its gold weight at 4.5 grams. BTW, these coins too have never devalued and now trade at 5-figure prices.

Ben Bernanke may also have a look at the USA's own monetary history. America's first genuine economic boom happened under a gold standard after the failings of 2 central banks (who printed too much money.) A gold ounce was worth $20 in 1815 and still the same 100 years later. Not that it blocked robber capitalism.
The depicted Eagle coin has the same purchasing power today as 150 years ago: As $20 would buy you a Colt revolver then, today's Colt prices expressed in S terms range around $1,250. I like this comparison because neither gold nor a Colt has changed in the past.
The 19th century can either be described as a free market paradise or "robber capitalism," depending whether your ancestors made it or not.Anyway, this was the time when the big fortunes of the Carnegies, Rockfellers, Morgans et al were made. They were lucky in one way denied to today's economy: They did not have to fear inflation as the Treasury could not mint gold out of thin air.
The Fed chairman could also take a clue from the Treasury gold reserve position.

TABLE: At a ridicuolous book value of $42.22/oz gold or 3.5% of the current market price of $1,235 gold is the biggest reserve position of the Treasury. Following are explanations from the Treasury:

Deep Storage: Deep-Storage gold is the portion of the U.S. government-owned Gold Bullion Reserve that the U.S. Mint secures in sealed vaults, which are examined annually by the Department of Treasury's Office of the Inspector General. Deep-Storage gold comprises the vast majority of the Reserve and consists primarily of gold bars. This portion was formerly called "Bullion Reserve" or "Custodial Gold Bullion Reserve."

Working Stock: Working-Stock gold is the portion of the U.S. government-owned Gold Bullion Reserve that the U.S. Mint uses as the raw material for minting congressionally authorized coins. Working-Stock gold comprises only about 1 percent of the Reserve and consists of bars, blanks, unsold coins, and condemned coins. This portion was formerly listed as individual coins and blanks or called "PEF Gold." Data: US Treasury

I cannot remember whether it was under Bernanke's time at the Fed or during his excursion to Bush's White House as chairman of the Council of Economic Advisers. But I am sure that Bernanke did not miss an exchange of Ron Paul and former Fed chair Alan Greenspan in one of his last congressional hearings. Asked why the US could not simply sell its gold reserves to pay down foreign debts if gold was only a non-yielding asset, Greenspan answered that in times of extreme stress or war gold is the only internationally accepted currency.
This is 100% true.
Long-term inflation shows that Federal Reserve Notes began losing their value as soon as the Fed was established.

GRAPH: US inflation was negligible and never lasted for longer periods until the creation of the Federal Reserve in 1913. Click to enlarge.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

As a student of the Great Depression it may also help to follow Murray Rothbards tedious work detailing that the Fed was first inflating money supply in the 1920s with all tricks off the book, laying the groundwork for the ensuing deflation in the 1930s. Find it here:
This one ranks even higher in the Amazon bestseller list:

More information on the virtues of a gold standard can be found at the

Record gold prices in recent days only confirm what the public has been hearing from clueless politicians: The Western world sits atop the biggest mountain of paper assets that will see as much deflation as we will see inflation in consumer prices as the final outcome of the biggest economic crisis in history.

Not a single fiat currency was able to hold its value in the last 3 centuries. Those around today will be no exception to the rule. This is no puzzling news but the continuation of a wrong monetary system with its mathematically foreseeable end. Remembering this quote from G.B. Shaw it will nevertheless be inevitable that we progress to a voluntarily accepted monetary standard. Gold has served that role well for almost three millenia.

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EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

A LESSON FROM HISTORY BOOKS: The past 300 years have proven that ALL fiat money experiments ended in complete devaluation. From Rome to Britain: every empire vanished into oblivion soon after it went off the gold standard. It is time to recognize the obvious: Unbacked money has never worked.

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About Me

I am an INDEPENDENT Certified Financial Analyst who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. 6 billion people in the developing countries now demand their fair share of the world's resources.
Having worked many years for a leading newswire I have learned to understand the fatal concept of ever expanding credit by heart. If you want to learn about the future of the economy, study history.